Can You Assign A Construction Contract From Yourself to Your Company Before Having A New Contactor’s License Issued for the Company?

The short answer is that you may be able to do that, but it may cost you tens or hundreds of thousands of dollars to find out. Although in Manela v. Stone, the court of appeal ruled that a licensed contractor could do that, it takes a lot of money to take your case to trial and then appeal it.  So be careful and do not end up in court!

The court in this case said did not violate Business & Professions (“Bus. & Prof.”) Code § 7031 when the contractor attempted to assign a home improvement contract from himself to his newly formed company while waiting for the California Contractors State License Board (“CSLB”) to reissue his license under the newly formed company’s name.

Facts of the Case: Did the Contractor Hold a Valid License During the Project?

In Manela, homeowner Yosef Manela (“Manela”), sued his general contractor, John Stone (“Stone”), and Stone’s company, JDSS Construction Company, Inc. (“JDSS”) alleging that Stone and his company were “alter-egos” of each other, had performed defective work and made material misrepresentations to induce Manela to sign the contract. In 2015, the parties entered into a contract and Stone began work on the project, but the project still wasn’t finished in late 2018, in part due to the numerous changes requested by Manela.

At that time, Manela stopped paying Stone’s invoices and sued Stone and his company. Stone responded by recording a mechanics lien on Manela’s property for the unpaid invoices and filed his own lawsuit against Manela to foreclose on the lien. However, Stone ran into some problems foreclosing on the lien because Manela claimed that Stone had violated California law by working without a license under the contract. It was undisputed that Stone performed the work on the project, the dispute was about whether Stone was performing in his individual capacity or as an agent of his company, JDSS.

Dispute Between Contractor & Owner Arises and Owner Refuses to Pay

The main issue revolved around a period of approximately three months during which Manela claimed that Stone was unlicensed after beginning work on the project. Stone held a general contractor’s license from 1982 to 2015 and did business as a sole proprietorship, but in 2015 he chose to change the structure of his business from a sole proprietorship to a corporation, which both used the same fictitious business name (JDSS Construction Company), and to transfer his license to the new corporation.

After accepting the Manela contract, Stone attempted to assign the contract from himself to JDSS. Stone also had requested that the CSLB reissue his contractor’s license to JDSS. The problem was the time it took the CSLB to process Stone’s request and formally reissue the license from Stone to JDSS.

The trial court ruled that JDSS therefore could not recover the unpaid invoices via the mechanic’s lien and granted Manela’s request to remove the lien. Stone appealed, and the Court of Appeal agreed with Stone because it found that JDSS did not perform under the contract while unlicensed. The Court of Appeal decided that Stone was not performing the contract on behalf of JDSS before the license was reissued in JDSS’s name and that the attempted assignment was not valid because the contract was for “personal services” to be rendered by Stone so it could not be assigned by Stone to JDSS without Manela’s consent.

Important Takeaway from This Case: Always Make Sure You Hold the Proper License

The outcome here appears to be an effort by the court to avoid punishing a contractor attempting to comply with the licensing laws. The court likely didn’t want to set a precedent that would disincentivize contractors from maintaining the proper licensing by punishing a contractor who simply was trying to reorganize his business structure and who had held a proper license for decades.

Luckily for Stone, the court viewed the facts in Manela as involving a licensed contractor conducting a change in business entity status where proper licensure was always in place, rather than involving an unlicensed contractor in violation of the law. But this case serves as a strong reminder that if a contractor is unlicensed at any time when they are performing a contract, they cannot then use a mechanics lien to recover unpaid invoices if the relationship with the owner breaks down.

Ghassemian Law Group has very experienced attorneys who can help you or your company not make the mistakes made in this case that had them end up in a lawsuit.  Come to us to prevent lawsuits before it is too late.  Being proactive can save you and your company, tens of thousands of dollars, if not hundreds of thousands.  Call us and let us help you before things go wrong.

 ¹ Manela v. Stone (2021) 66 Cal.App.5th 90.